OVERVIEW
Do We Boom Or Do We Bust?

With the stock market firmly in a bull run, everything looks promising as we kick off what could be a pivotal week. So long as nothing unexpected happens in the broader economy, U.S. stocks should continue to ride this momentum. That said, the highly anticipated Federal Reserve meeting this Wednesday could change the landscape quickly.

The Fed is expected to decide on its first interest rate cut since 2020, and all eyes will be on Chair Jerome Powell to see how this decision might impact the markets. Stock futures were steady on Sunday night, signaling a calm before a potential storm. A rate cut could fuel further bullish momentum, but as we know, markets don’t always behave the way we expect, especially with volatility likely to spike.

If you caught our weekend report, you'll know that the market is primed for a push higher. We've seen encouraging signs like expanding market breadth and a cooling VIX, alongside other key indicators. A rate cut on Wednesday is expected to be a tailwind for growth sectors, particularly small caps, which tend to benefit the most from lower borrowing costs. It’s one of the reasons we’ve seen small-cap stocks rocket lately.

The market’s reaction to a Federal Reserve rate cut—whether it's 25 or 50 basis points—comes down to two key factors: how the Fed communicates its reasoning and the reasoning itself behind the decision. Let’s break down why these are so important.

When the Fed cuts rates, it’s not just about the numbers—it’s about the message behind them. A 25 bps cut would suggest the Fed is making a measured adjustment, which could be a sign that they’re comfortable with the current economic conditions. A 50 bps cut, however, sends a stronger signal. If they explain it as a proactive move to maintain economic growth and aim for a "soft landing" (basically avoiding a full-blown recession), that could actually be great for stocks. Especially for growth stocks or smaller companies that thrive in low-interest environments, this kind of cut could be a green light for investors to keep buying.

But, if the Fed frames a larger cut in a way that seems panicky—like they’re worried about something serious coming down the pipeline—that’s when the market might react negatively. Investors don't want to feel like the Fed is making reactive decisions to stop a financial crisis, and if that’s the vibe they get, it could lead to a sell-off. Nobody likes uncertainty, especially if it feels like the Fed sees something we don’t.

Then there’s the reasoning behind the size of the cut. If it’s a 50 bps cut, it could signal that the Fed sees bigger risks ahead. But if they explain it as a precautionary move to keep things stable, that’s likely to be seen as reassuring. It would show that they’re staying ahead of any potential slowdowns and keeping the economy on track. On the other hand, if they make it sound like they’re cutting rates because of major issues like rising unemployment or financial instability, that could cause concern. Investors might start thinking, “What does the Fed know that we don’t?” And that’s when the market could get volatile.

So, what does all of this mean for today’s session?

Predicting exactly how the market will react to the rate cut is nearly impossible. Historically, a rate cut tends to be a bullish signal, so we could see stocks soar. However, it's crucial not to overestimate the impact. Positioning yourself by buying stocks before Wednesday isn’t a bad idea, especially if they're valid breakouts.

Just be cautious about taking on too much exposure. We're currently focusing on small 0.25R positions until the FOMC decision is behind us, and we have a list of 0.25-0.5R positions in our portfolio that are performing well. Let the relative performance of these stocks guide your decisions and stay flexible based on how the market unfolds.

Nasdaq

The Nasdaq has shown remarkable strength over the past week, surging straight up without the typical pullback or consolidation. This kind of uninterrupted rally is rare and highlights the current excitement around growth stocks.

Looking at the technicals of the last five daily candles, it’s clear that buyer aggression has been impressive. The tails on the first three green candles from last week reveal just how forcefully demand stepped in to overcome selling pressure, particularly as the QQQ tested its ascending support level between $448 and $451.

All of the QQQ’s exponential moving averages (EMAs) are trending upward, reflecting positive momentum. However, the Nasdaq is now approaching a significant resistance zone, with the QQQ hitting its point of control (POC) at $475.50. This level represents a major supply zone, and breaking through it won’t be easy. The area up to about $483 is notably dense with supply, so expect potential consolidation and sideways movement as it tests this zone.

Volume has been light on the recent up days, and the price acceleration is slowing as the POC is tested. It’s likely we’ll see a pause or consolidation before making a move past this resistance, possibly aligning with the upcoming FOMC interest rate decision in the next two days.

We want to draw your attention to the XLK, which tracks the technology sector. The chart for XLK reveals a multi-month sideways consolidation pattern. This pattern becomes more noticeable when compared to the QQQ, as XLK has been moving within a range and facing a descending level of resistance. This consolidation reflects a period of reduced volatility and a narrowing trading range, with no breakout above this resistance yet.

Given the current conditions—declining volume, the market gearing up for the upcoming interest rate decision, and the recent streak of consecutive green days—it’s likely we’ll see 2-3 days of sideways movement before any potential breakout above the overhead resistance. It’s unusual to see this many straight-up days without some consolidation or a pause.

S&P Midcap 400

The midcaps are showing impressive relative strength compared to their large-cap counterparts. Last Friday, the MDY (MidCap 400 ETF) experienced a significant green day with high volume. The index dipped intraday to test its rising 10, 20, and 50 EMAs, but was met with a surge of buying pressure that pushed it back up to its Point of Control (POC) at $555, closing the day just above this key level.

From a technical perspective, the MDY (MidCap 400 ETF) appears to be in a stronger position with more potential for short-term upside. The chart shows that the MDY is likely to target around $560, thanks to a low-volume pocket visible in the Volume Profile (VRVP) and the high relative volume observed on Friday’s candle.

Russell 2000

The small caps, tracked by the Russell 2000, are demonstrating a similar strong technical setup as the midcaps, with charts reflecting a robust breakout. Volume has been rising steadily over the past three sessions, culminating in a significant surge on Friday that pushed the index above its declining EMAs.

Currently, the Russell 2000 is gapping up in premarket trading and approaching a dense area of overhead supply as it nears its Point of Control (POC) level, which is close to multi-year highs.

It's challenging to predict a precise bias for the day, but small caps are looking particularly strong compared to other market capitalization groups. This strength is understandable given the prolonged underperformance of small-cap stocks over the past few years. In a low-interest-rate environment, these are the exact areas where institutional investors are likely to position themselves, suggesting we could see some remarkable moves in this sector in the near future.

DAILY FOCUS
Stay Patient & Play it Smart

As we gear up for the FOMC rate decision on Wednesday, there’s a growing buzz and a bit of uncertainty in the air. With so many eyes on the market, it’s easy to feel like you need to make a move right now. But remember Jesse Livermore’s wisdom: "One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world."

In simpler terms, don’t feel pressured to jump in or out of the market just because of the upcoming decision. This doesn’t mean you should liquidate all your holdings or completely avoid buying stocks if you see strong opportunities today. Instead, it’s a reminder that you’re not missing out if you choose to play it defensively and wait until after Wednesday to make your next move.

As swing traders, our main role is managing risk. Focus on that and remember, it’s okay to wait for clearer signals before diving in. Sometimes, the best move is to be patient and let the market come to you. By staying disciplined and sticking to your strategy, you’ll be well-positioned to make the most of the opportunities that come your way. Keep your head up and stay focused—good trading is all about smart decisions, not just quick reactions!

WATCHLIST
The Best Looking Stocks We See

NOVA: Sunnova Energy International Inc.

• NOVA, a standout in the solar energy sector, has been showcasing impressive relative strength throughout the year. Recently, the stock has been trading sideways, bouncing along its 10- and 20-day EMAs, and is nearing a potential breakout from its current range.

• The solar sector's upward trend is giving NOVA a solid boost. With the sector performing well, NOVA is in a prime position for potential significant gains.

• Coupled with its impressive annual revenue growth and small-cap status, NOVA has a lot going for it. This combination of factors makes it a stock to watch closely as it could lead to exciting opportunities in the near future.

AVAH: Aveanna Healthcare Holdings Inc.

• Aveanna (AVAH) is currently forming a very narrow trading range, with Friday’s session marking a positive development as the stock reclaimed its 10-day EMA and found support on the rising 20-day EMA.

• Given the strong performance in the healthcare sector, Aveanna looks poised for a potential breakout. If the stock moves above $550 on high relative volume, it could trigger a tester position of 0.25-0.5R for us.

• This setup aligns well with current market trends and sector strength, making it an intriguing opportunity to keep an eye on.